US economy takes surprise dive at end of 2012 as Washington budget crisis shreds business confidence

By Tanya JefferiesPUBLISHED:10:57 EST, 30 January 2013|

Setback to recovery: US economic record still contrasts favourably with the performance of the UK

The US economy has slammed to a halt, dealing a blow to hopes it will spearhead a global recovery in 2013.

Activity declined by 0.1 per cent in the final months of last year- a drastic drop from the 3.1 per cent growth seen in the summer quarter, and the worst performance since the US clawed out of recession in the middle of 2009.

Brutal defence cuts, a fall in business inventories during the 'fiscal cliff' crisis in Washington and Superstorm Sandy were blamed for the surprise economic contraction.

The setback flummoxed economists, who had anticipated around 1 per cent growth. But despite the recent knock to the recovery, the US still grew 2.2 per cent over 2012 as a whole.

This means the US record still contrasts favourably with the performance of the UK, which shrank 0.3 per cent in the fourth quarter but flatlined overall last year.

Wall Street took the news relatively calmly, sending the Dow Jones down 13 points to 13,941.5 in early trading. In London, the FTSE 100 index reversed from early positive territory to trade down 14.7 points at 6,324.5.

Investors were soothed by a bigger than expected rise in private sector employment, which is thought to bode well for the monthly non-farm payrolls jobs report this Friday.

The fragility of the US recovery also means the Federal Reserve is more likely to maintain emergency support measures to boost growth and jobs. Its ongoing asset purchase programme has helped to spur the New Year rally on global stock markets.

The decline in US output was mostly shrugged off by economists and market commentators.

'You got a combination of [business] inventories and defense which are taking more than 2 percentage points off the growth rate,' Nigel Gault, chief US economist at IHS Global Insight, told Reuters. 'This is not an indicator of recession.'

Anita Paluch of Gekko Global Markets said: 'With the expectations at 1.1 per cent the 0.1 per cent headline comes out as very weak, with investment in the private sector falling.

'Let’s not forget though, this number is based on estimates and is of course subject to very often sharp revisions. The silver lining is consumer spending – the main component of GDP – improved though.

'The overall growth of 2.2 per cent [for 2012 as a whole] may not be outstanding, but is still quite solid.'

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